Why Dollar Upside Could be Limited

This article was originally published on ETFTrends.com.

With global stocks sliding earlier this month, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) experienced a modest relief rally, welcomed news for an exchange traded fund that slumped 9.1% last year. However, some market observers believe upside for the greenback is limited in 2018.

UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP tracks the Deutsche Bank Long USD Currency Portfolio Index - Excess Return Index.

Obviously, UUP’s slack performance since early 2017 indicates shorting the dollar has been the right way to play the U.S. currency. The dollar slumped last year even as the Federal Reserve raised interest rates three times and the currency is tumbling against this year even amid expectations calling for another round of rate hikes.

“We expect the US dollar to weaken throughout 2018. We base our view on positive global growth and predicted changes in global monetary policy,” said Invesco in a recent note. “While we believe US growth will maintain its strengthening trend, growth across the developed world (especially in Europe and Japan) is likely to be even stronger. Global central banks, especially the European Central Bank (ECB) and the Bank of Japan (BOJ), are likely to tighten policy in response.”

Recently, President Donald Trump projected that the dollar would gather momentum as the U.S. economy expands. Following the president’s remarks, the dollar pared its decline that was triggered the day before when Treasury Secretary Steven Mnuchin said a weak dollar benefited the U.S. economy, which many observers took as a indirect support for a weak dollar outlook.

“In addition, strong global growth environments have historically led to a weaker US dollar, as US investors seek higher risk premia abroad and non-US investors stay home,” according to Invesco. We do not believe corporate repatriation flows will be a large driver of US dollar price action. Foreign profits are already largely held in dollar-denominated assets, and repatriation is likely to occur over many years.

Traders considering a bearish position on the dollar can consider the PowerShares DB US Dollar Index Bearish (NYSEArca: UDN), an inverse though not leveraged bet against the greenback.

For more information on the USD, visit our U.S. dollar category.